No matter where you stand on climate change or environmental stewardship, one thing is clear: It pays to be green. That message was driven home when Goldman Sachs upped its investment in energy-efficiency and clean-energy projects over the next 10 years from $40 billion to $150 billion. In fact, investing in energy efficiency is one of the best bets around, with a low risk comparable to U.S. T-bills (~ 5% risk index) but an average annual return upward of 20 percent – more than four times that of T-bills.
The business case for energy efficiency is especially strong for supermarkets and C-stores, where end-use energy takes a huge bite out of profits, second only to payroll. Nevertheless, many food retailers regard the up-front cost of projects to improve energy efficiency as a deterrent, if not a barrier. But it doesn’t need to be. In this three-part series, I’ll cover ways of financing projects that overcome barriers and maintain positive cash flow for stores.
On-bill financing is essentially free money
With on-bill financing (OBF), a project is funded by a utility company (or third-party investor) at 0 percent or a very low-interest rate and is paid back over time on a store’s utility bill. OBF has been around for a while (one of the earliest programs was started in 1993) but has seen a surge in popularity only recently. Currently, utilities in about 20 states have OBF programs or are in the process of implementing them; an additional number of state utility regulators are considering them.
In a nutshell, energy-efficiency projects literally pay for themselves with OBF. After a project is completed, a store’s monthly utility bill includes the cost of energy used and a partial repayment of the project; the total of the bill, however, will be roughly the same as what a store paid before the project.
Let’s say your project reduces energy consumption to the tune of $1,000 a month in savings. That $1,000 is applied to paying for the project, and this continues each month until it’s paid off. So, your monthly expense is about the same as it’s always been, but now you’re paying for both energy and the retrofits, instead of just energy.
Once the project is paid off, you’ll see lower utility bills. The benefits of your new equipment, however, start immediately. Along with reducing energy consumption and expenses, your project can reduce maintenance costs, defer some maintenance items, and improve the store environment and customer experience.
Another great aspect is that OBF can be structured to tie repayment to the property so that debt transfers across building owners or tenants. Also, by leveraging the existing relationship between a store and the utility, bill payment history can often be used instead of or in addition to a full credit report. Perhaps the best part is that utility rebates and incentives can be applied to OBF projects, further reducing or eliminating first costs and barriers for food retailers.
If OBF isn’t yet available in your area, traditional financing can still make sense. I’ll visit that topic in my next post.